Executive Insights Volume XIX, Issue 32

The Case for Digitally Printed Packaging

Brand owners seeking successful marketing Food and beverage labels out front strategies in a highly competitive marketplace are Relatively high brand/SKU fragmentation across numerous product categories has made food and beverage companies the predominant increasingly turning to digital printing to produce users of digital print services (some 50-60% of the market, according innovative packaging designs. In this Executive to L.E.K.; see Figure 1), with others including electronics, pharma and Insights, L.E.K. Consulting looks at if, when and personal-care providers. While many firms stand to benefit, the rise of digital printing is considered particularly advantageous for Tier 2 and how digitally printed packaging could change the private-label companies, which view digitally produced packaging as game across labels, cartons, flexible pouches and essential to product differentiation (for example, prepared food maker corrugated containers. Digital printing has the Bear Naked Granola adopted digital printing as part of the effort to design individualized granola blends and package designs). Craft beer potential to transform the packaging industry, labeling remains a prime example of digital printing in action — even but it will be a marathon, not a sprint. with the added cost, scores of microbreweries continue to invest in digital print packaging in order to achieve unique, attractive containers Digital technologies have substantially disrupted a number of bearing vivid colors and distinctive images. Digital printing has allowed traditionally analog industries (e.g., computers, cameras). Are we various other companies to keep pace with growing demand for at an inflection point today when digital printing can revolutionize microbrands, ranging from health-and-wellness products to those the consumer packaging industry? Could digitally printed aimed at specific demographics or regions. packaging equipment finally be ready to fulfill the promise of Today, differentiated product packaging is considered key to driving changing the game in consumer packaging? In certain segments, brand appeal and, in turn, piquing consumer interest. In recent usage of digital equipment for packaging is already compelling times, regional Tier 2 and private-label brands in particular have (e.g., labels for short-to-midsize run lengths). Beyond those turned to digital printing in an effort to compete with branded segments, the growth arc for digitally printed packaging is or Tier 1 suppliers. Even though this method costs more per unit, expected to continue to unlock additional segments, creating the reduced setup time and cost of digital printing makes it both an opportunity and a threat for players exposed to analog economically feasible for these smaller firms to offer a wider printing. Nonetheless, the existing barriers to adoption are real, range of short-run products and, in turn, take on much larger which is expected to drive a more gradual “evolution” of the competitors. Case in point: Since launching in 2012, French baby overall packaging market, rather than a rapid “revolution.” food start-up Yooji has brought to market over 20 different SKUs using limited digital print runs, vastly exceeding initial sales expectations in the process.

The Case for Digitally Printed Packaging was written by Thilo Henkes and Alan Lewis, Managing Directors and Jeff Cloetingh, Senior Manager in L.E.K. Consulting’s Packaging practice. Thilo, Alan, and Jeff are based in Boston. For more information, contact [email protected]. Executive Insights

Figure 1 For example, the rapid increase in SKU variations per brand, Worldwide digital printing market by packaging type as well as seasonal and other one-off promotional packaging (2016) applications, has driven brand owners to demand dramatically

Billions of dollars reduced run lengths and time to market, making digital far more attractive for a wide range of CPGs. Similarly, companies with 12 short-run products (e.g., Green Mountain Coffee Roasters’ K-cup ~$10B Other* ~$10B lids and cartons) have taken advantage of digital printing to 10 Flexible improve cost efficiencies in pre-press and raw-materials needs. Other** Corrugated Cartons Brand owners aren’t the only ones benefiting; digital technology 8 PC Pharma is also creating opportunities for other participants within the Electronics value chain, including package designer, pre-press, printer and 6 converter segments (see Figure 2). Packaging designers now have tools that afford them greater flexibility in developing packaging 4 targeted at microsegmented consumer bases, or packaging that Labels Food and Beverage hits faster refresh cycles. Prepress providers are not likely to be 2 disintermediated by digital, as pre-press still needs to provide graphic design and brand owner iteration management activities 0 (digital is a tool and does not negate the need for the typical By packaging format By end market types of services provided by the pre-press part of the value

Note: *Other includes rigid plastic and metal; **Other includes household and cleaning chain). Printers and converters can also benefit from digital as the products, tobacco, pet food/pet care, etc. technology is one more process to provide customers with added Source: L.E.K. analysis of various sources (e.g., Smithers Pira) value (though digital does require a different skill set from analog technologies and that does create challenges). Tier 2 and private-label brands are not the only users of digital printing. Larger national and global Tier 1 firms with longer print cycles are also turning to digital printing for specialty runs Figure 2 associated with tailored marketing campaigns (allowing the Implications of digital printing on likes of Reese’s, for instance, to rapidly increase the number of traditional packaging value chain players seasonal/holiday peanut-butter-cup promotions over the past 5-10 years). Additionally, digital printing allows CPG firms to Can now do much more targeted product positioning as brand owners bring products to market faster, while enabling them to utilize Brand microsegment their consumer bases as digital provides a cost-effective Design newer packaging solutions (such as custom QR codes) and mechanism for doing short runs improve labeling consistency. Digital gives packaging designers flexibility to make changes to Packaging packaging design/imagery to help position products to targeted Perks of digital printing Design consumers Digital printing offers brand owners a wide range of benefits, including: Prepress Digital is one more tool that requires capabilities and its own set of Design prepress product • The ability to streamline new product launches (especially for high-iteration prototyping) Many printers are still evaluating whether they want to offer the digital • Lower-cost, rapid setup makes shorter run lengths financially Printers technology, and some are trying to use traditional methods of printing (such as offset) to offer shorter run capabilities feasible

• Shorter run lengths means brand owners can microsegment/ Though not directly impacted by digital, converters need to be able to Converters change their production runs to accommodate the shift toward hypercustomize packaging aimed at specific consumer segments short/medium run lengths that digital enables • Reduced burden of carrying packaging material inventory

(a challenge for brand owners) Source: Company websites; L.E.K. interviews and analysis • Reduced risk of packaging obsolescence (which can lead to waste)

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Figure 3 • Equipment that can facilitate wider web widths aimed at Worldwide digital printing market by packaging type flexibles, cartons and corrugated packaging substrates (2010-20F) Despite the numerous advantages, digital penetration of printing CAGR% Billions of dollars technologies has been slow. Printers and converters using older (2010-15) (15-20F) ~$20B analog equipment such as offset, gravure and flexographic 20 Total 13.8 13.6 Other* 32.0 39.8 printers have little incentive to swap out legacy equipment that Flexible 58.2 29.1 Paperboard typically has a life span of several decades and, in many instances, cartons 44.5 37.5 has already been substantially depreciated. As such, printers and 15 Corrugated 14.4 13.6 converters balk at investing upward of $2 million to $4 million in order to build their digital print capability. Digital press run

~$10B Labels 12.2 10.2 times can be prone to print-head plugging, which can reduce job 10 speeds. Additionally, until recently digital has for the most part been a “narrow web” technology (i.e., limited to material under 16 inches in width) and, in general, has been suitable mainly for ~$6B 5 thinner substrates (as opposed to thicker paperboard stock, for example). Furthermore, analog printers are not standing still; analog printing equipment companies are increasing output speeds, which puts upward pressure on the hurdle to justify 0 digital print. 2010 15 20F Note: *Other includes rigid plastic and metal But with flagship brands increasingly pressured by competing Source: Smithers Pira; L.E.K. interviews and analysis private-label products with lower price points as well as challenger Tier 2 brands with highly focused customer targets, Growth prospects larger brands are themselves turning to unique, digitally Over the next several years digitally printed packaging is expected produced packaging in order to remain viable. Along the way, to advance incrementally, rising from 2.6% of the market in 2015 technological advances have made wider digital print jobs, such to 3.9% by 2020, and the segment as a whole is forecast to as those used for cardboard cereal boxes or other heavy stock double in size on a global basis (to $20 billion through the period; containers, increasingly cost-effective. And with per-unit pricing see Figure 3). Geographically, Australasia is expected to see the continuing to fall and printing speeds moving faster, the case highest digital penetration by 2020 (6.0%), followed by Western for digital becomes more compelling; by 2020, digital printing Europe (5.0%) and North America (4.8%). Product labeling is expected to be cost-effective below 35,000-40,000 labels per and increased demand for wider web applications (covering run (up from below 24,000 labels per run in 2016) and cost- corrugated, cartons and flexibles) will be key drivers through the effective below 35,000-40,000 flexible/carton units per run (up end of the decade, with prime labels likely seeing the biggest from below 16,000 flexible/carton units per run in 2016). Thus, increase in market penetration by 2020 (in contrast, nonlabel as the economic run length for digital continues to increase, Tier digital packaging applications are expected to show a more modest 1 companies and other firms with a wide range of SKUs and increase in share). A gradual reduction in consumable pricing packaging formats are likely to be more amenable to digital print resulting from increased competition is expected to drive down services, particularly as their smaller competitors continue to cut digital’s variable costs by decade’s end; in addition, an increase in into market share. digital printing speed is expected to reduce overhead costs by over 40% through the period, according to L.E.K. analysis. To date, digital printing has played a lead role in several successful Tier 1 product enhancements. Coca-Cola’s singular “Share a Furthermore, the rate of digital printing adoption is expected to be Coke” packaging campaign, whereby individual Coke containers driven by technology enhancements capable of producing higher- were embossed with popular first names of consumers in place quality content delivered faster and more efficiently, and include: of the standard Coke logo, was made possible using digital printing of more than 800 million labels in 15 languages across • Advanced print processing (from a current low of 78 ft/min 70 countries with 1,000-plus first names that went onto store to as high as 750 ft/min) shelves. Going forward, other larger brand owners are expected • Integrated finishing systems (such as die cutting, embossing/ to increasingly rely on shorter runs of differentiated packaging debossing) types as a tie-in to promotional campaigns and other one-off

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marketing efforts that would be economically challenging using traditional analog approaches. Digital printing checklist • Does your company view digital printing as a threat or Evolution rather than a revolution an opportunity? The ability to pique consumer interest through differentiated • Which attributes within the digital printing value chain packaging will remain central to product marketing going would work best for your type of business? forward, most noticeably within food and beverage but also for other segments with higher-than-average brand and product • Does your company have a strategy for how to leverage fragmentation. As such, we see digital print technology offering digital printing technology to be innovative and proactive a number of key advantages, not only for brand owners in in their marketing of solutions? need of greater flexibility but also for providers throughout the • Could digital printing help the firm better serve its current packaging value chain that can properly align their services to clientele, not to mention bring new customers into the meet the growth in digital demand. Though not quite a disruptive fold? Could it act as a front-end offering for the purpose technology per se, digital is nonetheless poised to increase its of pulling through existing services? share of the printed packaging market, particularly as newer solutions narrow the digital-analog performance gap, driving • Should your company build from scratch or acquire its down consumable costs in the process. digital capabilities? Are strategic partnerships necessary in order to be truly competitive?

About the Authors

Thilo Henkes joined Jeff Cloetingh is a Alan Lewis is a Managing L.E.K. in 2000 and Senior Manager and Director and Partner in L.E.K. has more than 15 member of L.E.K.’s Consulting’s Boston office. He years of consulting Industrial and co-leads Edge Strategy® services experience specializing Packaging practices. at L.E.K. and is the co-author of in transaction support He has experience Edge Strategy: A New Mindset and developing post- with global market for Profitable Growth. Alan was acquisition, value- assessments, growth selected as a Top 25 Consultant enhancing strategies for portfolio companies. strategy development, go-to-market by Consulting magazine in 2016. He has more than He is a Managing Director and Partner, and model creation and M&A. Jeff works 12 years of experience working on a wide variety of leads the firm’s Paper Goods and Packaging with a wide variety of packaging market projects, including corporate strategy development, practice. Thilo is also active in our Building participants across a range of substrate new product development and commercialization, Materials & Industrials Products and Private types, end markets and packaging types. mergers and acquisitions support, program Equity practices. management, and organizational improvement.

About L.E.K. Consulting L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded more than 30 years ago, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.

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